Legend Service Center just purchased an automobile hoist for $32,800. The hoist

Question

Legend Service Center just purchased an automobile hoist for $32,800. The hoist has an 8-year life and an estimated salvage value of $3,380. Installation costs and freight charges were $3,580 and $730, respectively. Legend uses straight-line depreciation. The new hoist will be used to replace mufflers and tires on automobiles. Legend estimates that the new hoist will enable his mechanics to replace 5 extra mufflers per week. Each muffler sells for $76 installed. The cost of a muffler is $40, ad the labor cost to install a Compute the cash payback period for the new hoist. (Round answer to 2 decimal places, e.g. 10.50) Cash payback period Compute the annual rate of return for the new hoist. (Round answer to 1 decimal place, e.g. 10.5.) Annual rate of return

Explanation / Answer

Annual Cash Inflow :-

($76 - $40 - $15) * 5 extra mufflers * 52 weeks = $5460

Cash Outflow = 32800 + 3580 + 730 = $37110

Salvage = $3380

Life = 8 years

(a) Cash Payback Period = Cash outflow / Annual Cash inflow

       = 37110/5460 = 6.80 years

(b) ARR :-

Depreciation = (37110 – 3380) / 8 years = $4216

Avg Accounting Income = Annual cash Inflow – Depreciation

=      5460 – 4216 = $1244

ARR = $1244/37110 = 3.4%

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